Initial Period Ratios Flashcards
Operating expense ratio (OER)
Total operating expenses/effective gross income (TOE; EGI)
-Shows how large mandatory expenses are compared to income
Debt service coverage ratio (DCR)
Net operating income/debt service (NOI; DS)
-Shows if income can cover debt, or how much debt you can handle
Why is DCR > 1.25 and not just 1?
It is a cushion for unexpected expenses, so you can afford debt
Breakeven or default ratio (BE/D)
(Total operating expenses + debt service) / effective gross income
(TOE + DB) / EGI
Total return on investment
NOI / price or value
-Represents capitalization rate and ROI, annual return
What should ROI be compared to when analyzing?
Discount rate (required ROR)
8-12% or more
-higher than cost of capital because of risk
Equity dividend/capitalization ratio
EDR or ECR
Before tax cash flow/initial equity
- Initial equity = down payment
- Also called cash on cash return
Should the EDR/ECR be higher or lower than the capitalization rate?
Higher, because you want to make more ROE than ROI
Performance ratios
Operating expense ratio
Debt service coverage ratio
Breakeven or default ratio
Profitability ratio
Total return on investment
Equity dividend/capitalization ratio
Rule for debt coverage ratio
Should be > 1.25
Rule for cap rates
Greater than discount rate
Rule for break-even
Should be less than .90
